As a long-term investment vehicle, a Stocks and Shares ISA can be a good match for my long-term approach to investing.
That might mean targeting long-term price gain.
If I had invested in Rolls-Royce a year ago, for example, my stake would since have tripled in value. If I had invested in NVIDIA stock five years ago, each £1,000 of shares I bought then would now be worth almost £33,000!
But a lot of the companies in my Stocks and Shares ISA attract me less for their price growth prospects than for the passive income streams I hope they can pay me in the form of dividends.
Finding income shares to buy
Imagine I decided I wanted to target £10 each day on average in such passive income. That would be £3,650 per year in dividends.
Starting with a £10K Stocks and Shares ISA, that might seem impossible. After all, few shares ever have a yield of 37%. Even if they did, such an unusually high yield would often be a red flag to me as an investor.
So, to start, I would forget about yield. Instead, I would hunt for great companies with strong cash generation prospects and attractive share prices.
One dividend share I’d buy
As an example, consider a company I would be happy to own in my Stocks and Shares ISA if I had spare cash to invest: Phoenix (LSE: PHNX).
The pensions and retirement specialist has a proven business model that is highly cash generative. Last year, for example, it was targeting cash generation of around £1.8bn and blew past that by generating over £2bn.
I think its customer base in the millions, proven expertise in managing pensions, and the right to use strong brands like Standard Life could help Phoenix keep doing well.
A financial downturn risks hurting profits, especially if it means the company’s valuations for things like its mortgage book turn out to be optimistic.
But remember I am investing my Stocks and Shares ISA for the long term. Phoenix has a progressive dividend policy and already yields a mouth-watering 10.6%.
Using compounding to my advantage
That means it is one of the highest-yielding shares in the FTSE 100. Imagine I target a more modest average yield of 7%, which is nonetheless still well above the FTSE 100 average.
At 7%,a £10K Stocks and Shares ISA ought to earn me £700 annually in dividends.
But if I simply reinvest them rather than take them as cash and my ISA compounds at 7% annually, after 25 years, I should be earning the equivalent of slightly over £10 per day in passive income. Target achieved.
